Wednesday, August 22, 2012

European Commission Proposes to Prohibit and Criminalize Manipulation of Libor and Other Benchmarks

The European Commission published amendments to the proposed Market Abuse Regulation and the Criminal Sanctions Directive for insider trading and market manipulation that would prohibit and criminalize the manipulation of Libor and other benchmarks. These pieces of draft legislation constitute proposals for a new EU market abuse regime, a piece of EU conduct regulation which creates prohibitions against and sanctions to apply to insider dealing and market manipulation. Commissioner for the Internal Market Michel Barnier said that the amendments ensure that the manipulation of benchmarks is clearly illegal and subject to criminal sanctions.

Libor is a benchmark to gauge the cost of unsecured borrowing in the London interbank market and sets the price for hundreds of trillions of dollars with of derivatives and other financial contracts worldwide. Although Libor is calculated in London, it is based on daily submissions from a number of international banks and is used as a global benchmark.

Specifically, the Commission amends the draft Market Abuse Regulation to bring benchmarks into the scope of the Regulation, using a definition of benchmarks based on that proposed in the Regulation for Markets in Financial Instruments Directive (MiFID). It has also proposed amendments to the definition of the offense of market manipulation to capture both attempted and actual manipulation of benchmarks themselves.

Similarly, the European Commission has proposed amendments to the draft Criminal Sanctions Directive to include the MiFID definition of benchmarks, amendments to the criminal offense of market manipulation to include the manipulation of benchmarks themselves, and amendments to the criminal offense of inciting, aiding and abetting and attempt to include these behaviors in relation to benchmarks.

The Commission proposes to require each member state to provide for criminal sanctions in its national laws to cover the manipulation of benchmarks, The Commission is not proposing to set the minimum types and levels of criminal sanctions; however it has proposed to undertake a review of the appropriateness of such minimums within four years of the Directive’s entry into force. At present, the UK Government has not committed to opt into the Criminal Sanctions Directive, and will review this decision upon the completion of the MiFID and the Market Abuse Regulation.

As part of the European Commission’s announcements on its proposed changes to the market abuse regime, Commissioner Barnier said that an even more specific formula and approaches will be required for all benchmarks, and that all those involved in the markets should be subject to regulation, including in relation to benchmarks. The European Commission and the European Central Bank, along with the IOSCO and the Financial Stability Board, are currently examining how benchmarks are established in order to identify weaknesses and shortcomings and suggest possible ways of addressing the problems at hand. This work is not limited to interest rate benchmarks.

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